ECB growing more sceptical of bond-buys - Weidmann

By IBT Staff Reporter On 12/14/11 AT 11:40 AM

European Central Bank policymaker Jens Weidmann delivered a blow to hopes of more decisive ECB intervention to quell the euro zone crisis, saying his peers at the bank were growing sceptical of its bond-buy programme, which he openly opposes.

Weidmann was witheringly critical of appeals for the ECB to do more to help debt-choked governments, comparing them to alcoholics pleading to be given a bottle, and said his Bundesbank would only provide fresh funds for the IMF to help fight the euro zone crisis if countries beyond Europe do so too.

The ECB's mandate prevents it from embarking on unlimited bond purchases and past experience showed this would inevitably lead to inflation, Weidmann said, resisting pressure for the bank to unleash unlimited intervention.

I think the idea is astonishing that one can win confidence by breaking rules, he told journalists over a dinner of guinea fowl late on Tuesday at the Bundesbank's fortress-like Frankfurt headquarters.

Weidmann said he was no fan of the ECB's bond-buy plan -- the so-called Securities Markets Programme (SMP) -- that it introduced last year to help tackle the crisis, adding: And the SMP's fans are becoming increasingly sceptical.

Weidmann's predecessor, Axel Weber, resigned this year in protest at the programme, which he felt took the ECB beyond its core inflation-fighting role and too close to fiscal policy.

The ECB has nonetheless come under pressure from the United States and Britain in recent weeks to do more to fight the euro zone crisis, and some politicians in the 17-country bloc want it to act as a lender of last resort to governments.

Weidmann would have none of it. Commenting on pressure for the ECB to fly to the rescue of debt-laden governments, he said: It is like an alcoholic saying that I need to get a bottle tonight.

Starting tomorrow I will be clean and abide by the rules, but I need the bottle tonight. I don't think it is sensible to give the alcoholic the bottle. He won't have an incentive to solve the problem.

The Bundesbank chief, who joined journalists for just one digest if after the dinner, said EU leaders reached agreements that go in the right direction at their summit last week but the ECB could not as a result be expected to go beyond the limits of its mandate by ramping up its bond purchases.

I do not share this logic, said Weidmann, who was Chancellor Angela Merkel's economics adviser until he took the Bundesbank helm in May. It is not our job to punish or reward governments.

Italy could live with bond yields of 7 percent for a while without serious problems and investors knew Mario Monti's Italian government was serious about making savings, he said, adding: Italy must deliver.

BOND-BUYS SLASHED

The ECB slashed its purchases of government bonds to little more than half a billion euros in the run-up to last week's EU crisis summit, as it raised pressure on the bloc's leaders to tighten debt controls and cut spending further.

Weidmann's opposition to boosting bond purchases contrasted with comments from ECB Executive Board member Lorenzo Bini Smaghi, who said in a newspaper interview that an ECB decision on this would depend on future market conditions.

Frenchman Benoit Coeure, who will shortly replace Bini Smaghi on the six-man board, went further on Monday, saying the ECB had to be prepared to increase its bond purchases if necessary but only in full independence.

Weidmann said the European leaders, who agreed to draft a new treaty for deeper economic integration in the euro zone, were right to tackle the roots of the crisis rather than look for a bazooka or nuclear solution.

He stressed the importance of euro zone policymakers keeping up credibility, adding: If an egg is broken, it is very hard to put it back together again -- and we are seeing that now in the currency union.

The measures agreed by European leaders to strengthen fiscal discipline have not convinced financial markets the debt crisis will be resolved.

But Weidmann insisted the way to address the crisis was for governments to clean up their budgets, pursue structural reforms to improve their competitiveness, and improve the euro zone's architecture.

NO 'PLAN B'

Weidmann dismissed the possibility of a euro zone break-up.

I want to make clear, in case someone feels nostalgic, that thinking of a return to the D-Mark would be fully absurd, he said, rubbishing the idea that the Bundesbank had Deutschmarks ready for use in its basement.

There are no such plans and they are nonsensical ... we are working to keep the euro as a stable currency, he added. There is no Plan B.

One measure European leaders agreed last week was for EU countries to provide up to 200 billion euros in bilateral loans to the International Monetary Fund to help it tackle the crisis, with 150 billion euros coming from euro zone countries.

However, Weidmann said in a letter obtained by Reuters on Tuesday that the Bundesbank was only willing to provide further resources to the IMF as part of a solution to the euro zone debt crisis if other EU and non-EU countries do the same.

He reiterated this position at the Frankfurt dinner.

If, for example, the U.S. and other important donors say they will not participate, then, from our viewpoint, it will be uncomfortably close to state financing ... That's why the conditions we have formulated are so important, he said.

If these conditions are not met, then we could not give our approval to these credit lines.

Weidmann played down the significance of a potential downgrade for Germany.

We have seen in recent times that the loss of triple-A rating has not led to an end of the world, he said.

S&P cut the United States to AA-plus from AAA in August.

Turning to the German economic situation, Weidmann said the Bundesbank expected growth of 0.6 percent in 2012, though he said expansive monetary policy and global growth would help the country's economy build steam later next year.

Asked about the ECB cutting rates further, he said: We have sufficient instruments to act.